A sale to private investors could be in the offing for Tweeter Home Entertainment Group, which plans to solicit bids from several interested parties before the end of the month.
A buyout, which could close within the next seven weeks, is one of several scenarios outlined by the ailing A/V specialty chain in its petition for Chapter 11 bankruptcy protection, filed Monday, June 11. In the document, chief financial officer Gregory Hunt said the company would entertain "any and all" restructuring alternatives, including a refinancing, an equity investment or a sale.
Tweeter said it had hired investment banking firm Peter J. Solomon Co. to help find investment capital, strategic partners or a potential buyer, and has since received interest from several third parties that president/CEO Joe McGuire described in a conference call as "hedge funds."
According to the filing in U.S. Bankruptcy Court for the District of Delaware, Tweeter is seeking Chapter 11 protection in order to access a $60 million debtor-in-possession (DIP) credit facility from GE Capital. The increased liquidity is a prerequisite for entering into a definitive agreement with a potential buyer, and will also allow the retailer to continue regular business operations.
"After considering a wide range of alternatives, it became clear that this course of action was a necessary and responsible step toward preserving Tweeter's viability as we address our financial challenges and work to secure our future," McGuire said in statement. He acknowledged during the conference call that Tweeter could emerge from the reorganization as a private company.
The filing came one month after the cash-strapped chain warned that it may be forced to reorganize under the bankruptcy code due to insufficient working capital. The company has been hobbled by slipping sales and the cost of closing a third of its store base, including hefty lease termination payouts and continuing rent obligations. Chapter 11 protection will allow Tweeter to extricate itself from its lease agreements, while the DIP facility "provides liquidity we wouldn't have otherwise," McGuire said.
In the meantime, the company expects to keep all ongoing stores open for business as usual, and will pay vendors, suppliers and other business partners for goods and services provided after the filing. Tweeter is seeking permission to return any "unusable goods" delivered before the filing, and has received approval from the bankruptcy court to pay the pre-petition claims of certain "critical vendors" in exchange for their agreement to continue supplying goods and service to the chain.
Tweeter's vendors were supportive. "Hopefully [they] can come out of this restructuring and become a strong, regional player," said Stan Glasgow, president of Sony Electronics. "It is difficult when a regional player, like Tweeter for instance, tries to go national. Whether it is logistics, infrastructure, or investment, over the years we've seen it's difficult."
But all retailers, he said, are facing more fundamental issues. "Consumer behavior is shaping retailing today... and making it tough for retailers. Around 80 to 90 percent of consumers do Web research before buying, and that puts more pressure on retailers."
Glasgow added that Sony had monitored Tweeter's situation and was not hurt by the filing.
Polk, a core trade partner that was included on the short list of critical vendors, "is fine in this relationship," said president Jim Herd. "We were working closely with the account to help keep them in business and we will be back in business with them again." Herd is confident in the company's core management team, and said Tweeter's biggest problem was its lease obligations. "The company's not broke — it's just out of cash. The filing cleans up the balance sheet," making the retailer "pretty attractive" to potential investors. "It could be a home run," he said.
Geoff Miller, president of Omnimount, is confident that "Tweeter is doing its very best to put its house in order. All companies face strategic decisions and should remain open to altering that strategy to meet business objectives. With change comes uncertainty," he said, "but we certainly hope the best for all parties involved."
Tweeter said it will continue to honor its customer service policies including returns, exchanges, credits and layaway programs, and will continue to pay wages, salaries and benefits for its 2,500 employees. Tweeter is dismissing 650 workers in association with 49 store closings, to be completed this month, and McGuire said additional layoffs may be in the offing as the company continues to right-size its business and expense structure.
"I am confident that with our tremendous talent pool of the best-trained, most knowledgeable sales and installation teams in the business, we will emerge from this process as a stronger, more competitive organization that is well-positioned to respond to and succeed in the ever-changing consumer electronics industry," McGuire said.
Tweeter is hoping to buy more time while its new Playground-format stores continue to gain traction. McGuire told analysts last month that the new units are outperforming their older counterparts in margin, sales and in-home installations within their respective markets, and he reiterated that rolling the concept into the company's remaining 104 stores is central to its strategy going forward.
In the meantime, sales continued to soften during the company's most recent full quarter, with net and comp-store sales from continuing operations both declining 13 percent during the three months, ended March 31. The retailer has sustained operational loses for the last six years.
In the filing, Tweeter attributed its current predicament to margin deterioration in TV, a "significant decline" in its 12-volt business, and increased custom install competition from Best Buy and Circuit City. As of March 31, the company had assets of $200 million and liabilities of $165 million, for a net worth of about $35 million. — Additional reporting by Colleen Bohen and Steve Smith